Call it another case of bad timing for Wall Street strategists.
The group, historically known to have a bullish bent, spent most of this year saying US stocks would end lower in 2023. Instead, the S&P 500 Index rallied 16% in the first half.
Then, slowly at first, strategists began raising targets. The optimist’s camp has since gained in popularity — just in time for the US stock benchmark to suffer its worst stretch in six months.
Bank of America Corp. and Societe Generale both recently boosted their year-end calls for the S&P 500 for a second time in 2023, forecasting that the gauge will resume a run toward 4,600 and 4,750, respectively. Even Wells Fargo & Co. expects the US stock benchmark to jump to 4,600 before fading again into the close of this year.
Those are bold calls given that the S&P 500 ended Thursday at 4,330. The gauge has flailed since August as traders grow anxious over how the Federal Reserve will deliver an economic soft landing while embracing higher-for-longer interest rates. The bout of weakness came just as strategists at firms including Citigroup Inc. and Goldman Sachs Group Inc. got more optimistic on US equities after failing to predict gains in the first half of the year.
The S&P 500 fell 1.6% on Thursday, breaching the average 2023 sell-side forecast of 4,366 on the index, a day after Fed Chair Jerome Powell reiterated his commitment to subduing inflation. It’s the first time the gauge has traded below Wall Street’s consensus year-end forecast since regional bank collapses shocked markets in March.
Even so, the benchmark is still up 13% this year as a resilient US economy wiped away fears of a recession. Investors have instead been able to focus on a recovery in corporate earnings — what some Wall Street soothsayers see as a catalyst for even more gains in US stocks.
To George Ball, chairman at Sanders Morris Harris, it’s clear the Fed is no longer the singular driving force behind stock prices. Expectations for earnings growth next year and institutional year-end portfolio maneuvering mean the S&P 500 is more likely to home in on all-time-high of 5,000 by the end of the year than it is to fall below 4,000, he said.
“American businesses and the economy — which in many ways are the same thing — are showing that 5% interest rates are not crippling to earnings or to growth or to an improving economic climate,” Ball said.
Wall Street’s Best Guess
The latest round of bullish forecast changes comes as Wall Street weighs the impact of trader sentiment on markets.
The S&P 500 has ended the year higher — and with stronger average returns than expected — in periods when strategists forecasted a decline, Bank of America’s Savita Subramanian found in an analysis tracking performance from 1999 to 2022. In short, bearish predictions make a year-end rally more likely, she wrote in a note this week.
Subramanian, who correctly called 2022’s stock selloff, was among the first of sell-side prognosticators to flip to a bullish call this year. She re-upped her forecast again this week, saying that indicators on the macro cycle, valuations and positioning are flashing positive signals.
At Wells Fargo, Christopher Harvey on Wednesday laid out the case for the S&P 500 to hit 4,600 as the market for initial public offerings reopens with a flurry of recent listings — then fading again to 4,420 by year’s end.
Deleted and delayed predictions for an economic downturn, meanwhile, have inspired Manish Kabra at Societe Generale to embrace a similar type of near-term optimism. He expects the equity benchmark to hit 4,750 by the end of the year, then tumble back to 3,800 by mid-2024 amid a crunch in consumer spending and deteriorating business conditions.
“Put another way, we stay bullish near term,” he said in a note to clients, “despite the likely jitters in 2024.”
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